What is a Secondary Buyout (SBO)?
The term secondary buyout (SBO) refers to a transaction involving the sale of a portfolio company by one financial sponsor or private equity firm to another. This type of acquisition marks the end of seller control or involvement in the company. Secondary buyouts have historically been recognized as panic sales. Therefore, it can be difficult to complete them. A secondary buyout is usually not the same as a secondary market purchase or secondary buyout that involves the acquisition of the entire asset portfolio.
- A secondary buyout is a transaction involving the sale of a portfolio company to another company by one financial sponsor or private equity firm.
- SBO opportunities provide sellers with immediate liquidity.
- These buyouts make sense when the selling company realizes a return on the investment, or when the buying company can provide more profit to the entity to which it is sold.
Mechanism of secondary buyout (SBO)
A secondary buyout is a financial transaction that involves the sale of a portfolio company (the entity in which the company invests). Buyers and sellers are usually financial sponsors or private equity firms. Secondary buyouts provide a clean break between sellers and other partner investors. Private equity companies trying to end their investment had two other options. You have published your portfolio company or sold it to another company operating in the same industry.
Part of the reason sellers’ private equity companies seek secondary buyout opportunities is that they offer immediate liquidity similar to an initial public offering (IPO). The scope may be small, but SBO eliminates the need for distributors to meet the regulatory requirements associated with IPOs. A secondary buyout is meaningful if the seller has already made a significant return on the investment, or if the private equity fund to buy can provide a greater return to the company being bought or sold. Buyouts are considered distressed sales because they occur when a company needs to sell an asset to avoid financial problems. In these cases, most limited liability investors considered it an unattractive investment.
The distributor can waive the regulatory requirement to expose the entity by receiving a secondary buyout.
In the 2000s, secondary buyouts became more popular. This development was driven primarily by the increase in capital available for such acquisitions. The number of SBOs continues to grow. In fact, over 40% of all private equity exits are due to secondary buyouts. Private equity firms continue to pursue secondary buyouts for a variety of reasons, including:
- Selling to strategic buyers or IPOs may not be a niche or small business option
- Secondary buyouts may be able to create faster liquidity
- High-flow, slow-growing businesses may be more attractive to private equity firms than public equity investors and other companies.
There are several things a buyout company can do to make sure a buyout makes sense. This includes determining the potential for future success of an entity by reviewing previous successes and conducting stress tests and other investigations.
Secondary buyouts are successful when the investment needs to be sold or matured to the desired extent, rather than continuing. Or if the investment creates great value for the sales company. Secondary buyouts can also be successful if buyers and sellers have complementary skill sets. In such scenarios, secondary buyouts generate significantly higher returns and can outperform other types of buyouts in the long run.